Risk Management Technology in Financial Services

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10 Risk management technology in financial services

example is China, Inc. After half a dozen years of prospering as the world’s workshop,

China now wants to be the world’s laboratory as well:

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Innovation has become a national buzzword, and

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Chinese leaders have been tossing it into their speeches since the beginning of 2006,

as the country starts an ambitious campaign to drive its economy further up the

value chain.

Because of deregulation, globalization, innovation and technology – therefore

because of an accelerated pace of change – banking is experiencing similar challenges

to those of IBM, Microsoft, Google and China. To be successful, bankers should not

only understand the products of innovation, but also master them, which requires

cultural change. In a meeting at Bankers Trust in 1990, the executive vice president

David Sias suggested that for the next ten years, the bank will continue to make

money from paper. The large investments in high technology that we make today,

Sias said, aim to change our culture.

1.4 Strategic choices and unintended consequences

Entrepreneurship underlies the prosperity characterizing a free-market economy, and

the competition that it brings into place obliges the entrepreneur to move rapidly so

as not to fall behind. The cases examined in the preceding sections have demonstrated

how tier-1 entities develop novel ideas into successful businesses, by promoting:

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Creativity applied to business life,

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The need for tangible deliverables, and

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Ways and means for being in charge of assumed risks.

In the late 1980s, two financial companies of different backgrounds – Bankers Trust

and Salomon Brothers – attempted to move into merchant banking on a large scale.

Salomon led an investment group in an unsuccessful effort to acquire control of RJR

Nabisco by means of a leveraged buyout. This had a lot of unintended consequences.

While Salomon’s bid did not succeed, the attempt signalled bond rating agencies

that the investment bank was prepared to increase its total risk appetite. The mar-

ket meditated on the after-effect, and ended with a negative appraisal. This hurt

Salomon’s other lines of business, which were significant sources of profits and had

sustained the company over the years.

For Bankers Trust, too, its merchant banking foray seemed to have little connection

to the leadership it had acquired in personalized customer products. Specifically, its

derivatives business, which was the main market thrust since its previous strategic

plan. On Wall Street, analysts said the change towards merchant banking was a

mistake, for a number of reasons:

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The customers were different,

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The employees were different,

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The technology was different, and

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The required management skills were different.